Residential mortgage lenders often speak of the importance of customer retention, but not many of them can quantify in dollars and cents what they think customer retention is worth. That’s according to Matt Lind, senior partner at Boston-based STRATMOR Group, in the company’s latest Insights report.
In the report, Lind extolled the virtue of a largely unheard-of metric when looking at continuing customers‒‒the post-closing experience borrowers have. This, he said, can offer valuable insight into how likely a customer is to come back for a new loan some day.
“Few lenders ask repeat borrowers why they returned and I don’t know of a single lender that asks payoff borrowers who weren’t retained why they went elsewhere for their new loan,” Lind said. “Without knowing this, lenders cannot really assess all of the benefits associated with investments in people, processes and systems that, among other benefits, would be expected to improve borrower satisfaction and customer retention.”
Because of extremely low interest rates, Lind said, the current origination environment lowers the economic value of customer retention. From a purely mathematical perspective, if pre-payment speeds hit zero (which he said is not actually possible in the real world), there would be no need for customer retention at all.
“But what would happen if rates were to rise and pre-pay speeds increase?” he said. “Increases in servicing value can be used to fund price concessions, further improving retention and helping to enhance competitive edge.”
After much mathematical analysis, Lind concluded that a portion of the value created by customer retention “can be allocated to operational improvements that increase borrower satisfaction and hence, the likelihood that a borrower will become a repeat customer. It can also be used to price more aggressively, not just at the time of the lender’s first loan origination with a borrower, but every time thereafter.”
Overall, he said, the economics of using high customer retention to fund price concessions “remain compelling.”
“After all,” Lind said, “lenders have been doing this for years by seeking to be low-cost producers and using a portion their back office expense advantage to improve their pricing.”